Lululemon stock recovers despite RBC downgrade, exec departure

The departure of Lululemon Athletica Inc.’s chief product officer in the wake of the apparel chain’s sheer yoga pants scandal worried some industry analysts on Thursday, but the retailer’s shares managed to recover their momentum.

No official reason was offered for the departure of Sheree Waterson, who was president of swimwear brand Speedo North America and vice-president of women’s apparel at Levi Strauss before joining the Vancouver-based sportswear chain in 2008. She will leave Lululemon by April 15, the company said Wednesday.

“We believe [Ms. Waterson] was instrumental in the design process for the last five years and was also a strong creative leader,” analysts Howard Tubin and Tal Woolley of RBC Capital Markets said in a note to clients on Thursday. They lowered their rating on the retailer to sector perform from outperform, and cut their price target to US$70 from US$80. Lululemon shares closed Thursday at US$65.66, up US$1.42 or 2.2% on the Nasdaq.

“With increased risk and no better entry point, we are downgrading the shares,” the analysts said. “It is Ms. Waterson’s departure that is the impetus for our downgrade. “While we continue to believe Ms. Waterson has a solid design team in place, the loss of her creative leadership adds a new level of uncertainty to the story.”

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The RBC analysts maintained their respective 2013 and 2014 earnings estimates of US$1.98 and US$2.42 per share for Lululemon, whose shares tumbled last month after the retailer was forced to recall 17% of its women’s yoga pants from store shelves and warehouses when employees determined a number of them were too see-through. Lululemon said the recall would reduce first-quarter and full-year earnings.

“However, we expect near-term disruption to the business, particularly in the first half of 2013 as the company works on solving the shortage in the supply of black Luon pants and [cropped pants],” Ms. Tennant wrote in a note to clients. She maintained her earnings estimates for fiscal 2013 and 2014 of US$1.96 and US$2.38, respectively.

The problem in Lululemon’s proprietary Luon fabric should be “short term, identifiable, and solvable,” Ms. Tennant said, but added there is uncertainty about the pace of sales and margin recovery for the second half of the fiscal year. Lululemon in March said customers should be prepared for a shortage of Luon pants in stores and online while it sorts out the mishap.

In a separate statement on Wednesday, Lululemon said the fabric at issue in the pants recall had met its testing standards. But an investigation has determined the Luon “was on the low end of Lululemon’s tolerance scale and we have found that our testing protocols were incomplete for some of the variables in fabric characteristics,” the company said.

Lululemon has also sent a group of employees to its manufacturers’ facilities to ensure new fabric testing and standards are being met.

In an analyst call last month, Ms. Day famously said the most accurate way for customers to determine whether or not they had bought the defective pants was to “put the pants on and bend over.”

Analyst Roxanne Meyer of UBS Investment Research, meanwhile, maintained her buy rating on the shares and price target of US$77.

“We support management’s decision to reorganize its product leadership in response to the growth and complexity of the organization,” she wrote in a note to clients.

“We believe the swift communication of company findings and remedies to quality could minimize any overhang on the stock, and we view guidance as achievable and likely conservative.”

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.

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